Thousands march in Rio over oil dispute, pressuring Rousseff

People hold signs during a protest in downtown Rio de Janeiro, November 26, 2012.

Reuters/Pilar Olivares

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Demonstrators yell slogans with their faces painted during a protest in downtown Rio de Janeiro, November 26, 2012.

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A man plays a guitar during a protest in downtown Rio de Janeiro, November 26, 2012.

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RIO DE JANEIRO (Reuters) - As many as 200,000 people demonstrated in Rio de Janeiro on Monday to urge Brazilian President Dilma Rousseff to veto a bill that local officials say could cost Rio state billions of dollars in lost oil revenue and cripple plans to host the World Cup and Olympics.

Late Monday, a person familiar with the president's plans said Rousseff is planning to veto at least part of the bill, particularly a portion that redefines royalty payments for existing oil production in Brazil.

The president, the person added, instead will propose that Rio and Espirito Santo, the two states with most of Brazil's oil output, continue to get a level of royalties from current production similar to what they received last year. The partial veto would not change parts of the bill that redefine oil royalties from production at new fields.

For Rousseff, the protest raised the stakes on what may be the most sensitive decision she has faced in her nearly two-year-old government: How to distribute tens of billions of dollars in expected revenues from a massive offshore oil field that Brazil discovered in 2007.

The bill, passed by Congress this month, would spread the windfall more evenly to Brazil's 26 states and federal district. As submitted for her approval, however, it would also alter royalties on existing production, angering Rio and other south-eastern states where most of Brazil's oil is located.

Rousseff has until Friday to veto the bill, but is expected to decide on the partial veto on Thursday, the person said.

Monday's event had attracted about 200,000 demonstrators by early evening, according to police calculations.

The protest began with a march through Rio's colonial centre and was followed by a series of speeches, concerts, and impromptu revelry that at times gave it a festive air. In recent days, state officials plastered streets and buildings with banners advertising the protest in large black and white lettering and a command in red for the president: "Veto, Dilma."

Rio is spending tens of billions of dollars to build stadiums and other infrastructure for the 2014 football World Cup and the 2016 Summer Olympics - two marquee events expected to attract hundreds of thousands of visitors.

Rio Governor Sergio Cabral, an ally of the president, led the protest. He has cast the debate in dire language that analysts say may exaggerate the financial stakes but has nonetheless intensified political pressure on Rousseff.

The bill "would devastate the state budget and compromise the future of Rio. The state would be inviable," Cabral told journalists after the protest.

He urged Rousseff to veto parts of the bill dealing with royalties for existing production, which he said would cost producer states and cities 6.5 billion reais (2 billion pounds) in 2013 alone.

Approving the bill could hurt Rousseff's relations with Cabral's PMDB party, a large and ideologically shape-shifting group that is a linchpin of the broad coalition that supports her ruling Workers' Party.

Rousseff has vowed to further Brazil's efforts to reduce poverty, in part by redistributing the windfalls from its growing commodity exports - from oil and iron ore to foodstuffs.

Throughout the day Monday, police had cordoned off large swaths of Rio's centre, along the river-like bay that gives the city its name. State and municipal officials facilitated attendance by waiving subway and ferry fees and providing buses from far-flung towns outside the capital.